LOS ANGELES — It was in August 2007 when investigator Eric Bremner found evidence in a shredder at Olympic Escrow Inc. that he said confirmed borrowers' complaints that they had never signed the mortgage documents that pushed them into a new financial hell.
Bremner found pieces of documents that had been cut to remove signatures and notary seals. Loan applications, escrow agreements and other documents had signatures that had been taped on, he said.
"That validated the statements that the victims had been making over and over again: That they did not recall signing these documents and they did not agree to the terms of the loans they were given," said Bremner, a senior investigator in the real estate fraud unit of the San Bernardino County district attorney's office.
The discovery triggered an investigation that led to Tuesday's closure of seven mortgage companies in an ongoing campaign against predatory lenders.
A family is suspected of leading an operation that processed thousands of home loans in California during the past several years in the widespread refinancing scam.
The case has brought renewed calls for tighter regulation of the troubled mortgage industry that threatens to take the U.S. economy down with it.
Experts said the fraud occurred in a weak regulatory environment in a business that offered huge financial incentives to brokers willing to cheat.
"There's no regulatory oversight, it's all complaint-based," said Dustin Hobbs, communication director for the California Mortgage Bankers Association. "Like these people found out, until you file a complaint, there's no oversight of these brokers."
Prosecutors called it the most brazen case they had ever seen, and an operation that had slipped past loan officers and regulators in a booming housing market fueled by greed.
"I haven't seen anything this extreme ever before," said Christina Tusan, the California deputy attorney general assigned to the civil case in which the web of companies is being sued for more than $20 million.
Lenders in that booming period were interested in rapid approvals and high volumes and failed to raise questions about suspect deals, said Paul Leonard, California director for the nonprofit Center for Responsible Lending.
"Their levels of due diligence for reviews of their loans coming in from brokerage channels were not particularly rigorous," he said.
The group is accused of targeting unknowing homeowners whose homes had escalated in value by offering dreamlike mortgage refinancing offers, with promises of cash back and lower monthly payments, Bremner said.
Victims later learned they had been locked into high interest rate loans, excessive fees and unfavorable terms. In some cases, the cash back never materialized.
Late Tuesday, the man authorities say was the ringleader in the scam, 25-year-old Eric Pony, and his sister, Paulette Pony, 23, turned themselves into police to face charges including conspiracy, grand theft, forgery and elder abuse. Five other suspects also were arrested.
The crackdown began with Eric Pony's company, Lifetime Financial Inc., and spread to others after Pony lost his real estate license in September and transferred his operations to other companies with active mortgage broker licenses, authorities said.
Lifetime Financial's main mortgage provider was New Century Mortgage Corp., which has since folded.
Bremner said loan documents often ran a cumbersome 300 pages. In many cases, problems were missed amid the rush to earn commissions for quickly approving deals.
"Based on the volume of loans that New Century was doing at the time, it was either a combination of just missing these items or just looking the other way," he said.
Several proposed laws attempting to address the collapse of the industry are pending before the state Legislature.
It includes Assembly Bill 2880, which would impose a greater fiduciary duty on mortgage brokers to act in the best interests of the borrower.
Today, brokers receive "yield spread premiums" to sign borrowers at interest rates that are higher than the rate for which they are qualified.
Other bills include AB 512, which would require documents to be translated into languages like Spanish or Chinese when contracts are negotiated in that language. Many of Lifetime Financial's alleged victims spoke Spanish or Tagalog but the contracts were in English.
"Those bills together represent a fairly comprehensive package of reforms," Leonard said. "They would fix some of the distorted incentives around kickbacks to brokers ... and strengthen the system of accountability for everyone in the mortgage origination process."
For Tracylyn Sharrit, 40, the regulations would be too late.
After meeting with Eric Pony, she said she found her signature forged on loan documents and the monthly payments on her three-bedroom, 1,100-square-foot home in San Bernardino jumped from $1,070 to $1,868.
The money promised to her in an equity cash-out has been whittled away on lawyer fees, and her loan amount ballooned from $167,000 to more than $260,000.
Making ends meet is harder than before for the marketing director of a nonprofit company.
"I took my daughter to the doctor the other day, and I'm thinking, 'How much is the co-pay?' I've never had to think about that before," she said.